Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Tuesday, January 31, 2012

House Members Ask SEC to Delay Registration of Private Equity Fund Advisers

In a bi-partisan letter to the SEC, seventeen House Members, including Capital Markets Subcommittee Chair Scott Garrett (R-NJ), asked the Commission to delay the March 30, 2012 implementation of regulations requiring the registration of investment advisers to private equity funds and to exclude advisers of private equity funds that are not highly leveraged at the fund level from the registration. The Members believe that applying these new requirements to private equity is detrimental to capital formation and job creation and does little to protect consumers and address potential systemic risk. Given the lack of systemic risk associated with private equity funds and the sophistication of the investors in private equity funds, the substantial costs of registration outweigh any potential benefits.

In the view of the Members, the SEC’s registration requirements do not sufficiently consider the nature of private equity funds and the significant differences between private equity and other types of investment pools. Private equity firms employ long-term investment strategies by locking in capital for multiple years. Private equity investors are typically highly sophisticated qualified purchasers who have committed capital for a fixed term and cannot withdraw from that commitment.

Further, the Members emphasized that, given the lack of systemic risk associated with private equity funds and the sophistication of fund investors, the substantial cost of requiring registration of the fund advisers outweighs the potential benefits. Private equity funds will have to expend substantial resources for the establishment and ongoing operations of a compliance program, with many of these costs funneling down into the fund’s portfolio companies, creating burdens for those company managers.

In addition, the Members believe that requiring registration by private equity fund advisers not only misdirects resources at private equity firms but also at the SEC. As a result of private equity fund adviser registration, the SEC will have hundreds of new firms to oversee and inspect, thereby diverting regulatory resources from the core duty of protecting retail investors and other new oversight priorities that can contribute in a meaningful way to financial stability.

The legislation directs the SEC to define the term private equity fund and also directs the SEC to adopt rules requiring private equity fund advisers to maintain records and provide the SEC with reports the Commission deems necessary after considering fund size, governance, risk and investment strategy. The legislation was introduced by Rep. Robert Hurt (R-VA); is co-sponsored by House Financial Services Committee Chair Spencer Bachus (R-ALA) and Capital Markets Subcommittee Chair Scott Garrett (R-NJ).

The Dodd-Frank Act requires most advisers to private investment funds to register with the SEC, including advisers to private equity funds. Rep. Hurt said that the legislation is designed to give private equity firms the same exemption that venture capital firms enjoy under Dodd-Frank.

Committee members are concerned with the private equity registration requirement. They do not see private equity firms as a source of systemic risk. Rep. Gary Peters (D-MI) said that private equity firms are not generally liquid and not highly leveraged, and thus do not pose a systemic risk. It makes no sense to treat private equity firms the same as large hedge funds, he posited. Rep. Hurt fears that the over-regulation of private equity firms could lead to less job creation. He believes that the registration requirement imposes an undue burden on private equity firms.